New York’s Missing Megastores

As recently as the 1950s, New York was the shopper’s Mecca. A century had passed since the flowering of the grand urban department store, but New York’s avenues were still home to the finest examples of those monumental palaces of commerce: Wanamaker’s and McCreery’s, Stern’s and Arnold Constable, Altman’s and Bonwit Teller, and of course Bloomingdale’s and Macy’s. New York’s stores were unrivaled, and visitors flocked to the city to buy its wares.

Today, New York is a retail backwater. It not only fails to attract the dollars of outsiders, but it increasingly sends its own residents elsewhere to do their shopping. Gothamites pay over $3 billion annually for retail purchases outside the city, not counting food. While neighboring suburban counties enjoy an average of $187 in retail sales for each $1,000 of personal income, the city manages just $136 by the same measure, with a dismal $111 in retail sales for each $1,000 in personal income in the outer boroughs and—incredibly—a mere $175 in Manhattan, despite its millions of commuters and tourists. As a recent survey found, close to a third of New York City households shopped in large retail stores outside the city during the past year. These shoppers averaged 22 trips with a tab of $154 on each excursion. Three out of four said they would have preferred to shop in their own borough, but the stores they want, they say, simply aren’t there. As director Joseph B. Rose of the Department of City Planning sums up, “We are competing with places just across the city line, and we are losing.”

Why? Part of the answer is undoubtedly demographic. The suburbs grew mightily in the postwar years, and retailers followed the flow of people, jobs, and purchasing power. As their customers melted away, more than 50 big stores in the city closed down. At the same time, New York developed into the nation’s biggest, costliest municipal welfare state. Businesses of every sort, retail included, fled the exorbitant taxes and worrisome social pathologies that resulted, finding it far easier to make money elsewhere.

But no factor has contributed more to New York’s decline as a retail center than the city’s backward-looking zoning laws. In 1974, as the city’s manufacturing base crumbled, the planners hit on a great idea—or so they thought. They would arrest the decline by making the city’s industrial areas off limits to stores of over 10,000 square feet. After all, they fallaciously reasoned, since large retail operations were increasingly taking over the buildings of hapless manufacturing tenants, they must be forcing those factories out of the city and thus causing the city’s blue-collar woes. Manufacturing continued its long decline, of course, but the city also succeeded in shutting out the next great innovation in retailing. Having given the world some of the most lavish and successful department stores, New York decided that it could do without the megastore.

But shoppers wanted the megastores, with their low prices and huge, varied inventories, and they were willing to trek to the suburbs to find them. The result has been a suburban retailing boom. Malls, discount centers, and superstores now ring the city, from the countless Wal-Marts, Home Depots, and Kmarts of northern New Jersey to the Westchester Mall to Nassau County’s Roosevelt Field and Valley Stream shopping centers. Between 1984 and 1991, over 90 percent of the building permits for new stores issued in the region went to the suburbs. By contrast, over the past two decades, the city has attracted a mere 7 percent of the region’s new retail investment. The city’s booby prize in this competition: more than 3,400 acres of unused land, overwhelmingly located in the outer boroughs, that is zoned for manufacturing and that any number of large retailers would gladly develop if given the chance.

Now, some 20 years after the planners’ folly, Mayor Rudolph Giuliani hopes to give the megastores their chance at last. If he succeeds in the face of the usual anti-business protests, the reform could be an enormous boon to the city, bringing new life to economically depressed neighborhoods, boosting employment, and extending the benefits of the ongoing revolution in retailing to New Yorkers of every class.

For retailers seeking to open stores in the city’s decaying industrial areas, the 1974 zoning provisions established a truly draconian regulatory regime. In “heavy” manufacturing zones, the new law simply banned the businesses whose depredations the planners most feared: large department and variety stores and oversized retailers specializing in food, clothing, furniture, appliances, and carpets. In “light” manufacturing zones, the law targeted the same “dirty seven,” as the planners christened these retail categories, but held out the possibility of exceptions, in the form of special permits. The regulations did not apply to book, toy, drug, or office-supply stores, which were far less likely anyway to want the big spaces available only in the deep lots of manufacturing areas.

Megastores in this last category have flourished in the city, finding space in areas already zoned for retailing and occasionally in manufacturing areas, where they can open “as of right” under the 1974 law. But these are relatively small operations as megastores go. A Staples measures some 20,000 square feet, while the biggest of Barnes & Noble’s superstores in the city covers 60,000—a range that comfortably accommodates the average Toys R Us and Duane Reade, as well as the much ballyhooed new Borders Books at the World Trade Center. What these successful megastore retailers have in common is small, easy-to-handle merchandise, none of which requires customer parking or elaborate facilities for loading and unloading.

The real losers under the 1974 zoning regulations were the larger megastores, needing vast shopping floors and wide roads, parking lots, and shipping docks for moving their bulky goods and making them accessible to shoppers. Often 100,000 square feet or more, these megastores do business in every category of the planners’ “dirty seven,” and they are today’s true retailing trailblazers. They sell on a monumental scale and offer goods at razor-thin markups, often just a few cents on the dollar above wholesale cost. Customers range through aisles piled high with merchandise, looking for everything from poultry and Pampers to dresses and dining-room chairs. Offshoots of the members-only warehouse shopping that sprang up on the West Coast in the sixties and seventies, these stores attract a clientele that is middle class, family oriented, and very price conscious.

Retailers have tried to establish beachheads in the areas that New York’s current zoning system deems eligible for special permits, but their efforts have seldom paid off. In 1993 Kmart began making plans to open a store on Northern Boulevard in Queens on a site zoned for light manufacturing. When the city granted the permit two years later, the company was no longer interested, having found more attractive markets elsewhere. By the time Caldor’s two-year wait for a special permit to build a department store in Sunset Park, Brooklyn, was over, the company was bankrupt. Now Price Costco, one of the originators of members-only warehouse shopping, has snapped up the Brooklyn site, along with the development rights issued to Caldor. Says Price Costco president Jeff Brotman, who had been looking for appropriate locations in New York for more than five years without success, the city is “full of wasted property that could be used for modern retailing.”

The exasperating and time-consuming permit process has had a chilling effect on the development of new retail space in New York. According to Pamela J. Fairclough, project director of the Community Food Resource Center, a nonprofit group aimed at bringing better food stores to low-income and minority New Yorkers, “you may have to invest three years and half a million dollars without even being sure you’ll get the special permit in the end. Even then, the business climate may have changed. Why take the risk and go through the tortuous and unpredictable application process?” Prospective retailers have been asking that question for years. In fact, the last time a retailer obtained a special permit for a new building—and then went on to complete the project—was in 1989, when Waldbaum’s built a supermarket in College Point, Queens. A meager total of eight new stores have been built with special permits since 1974.

Jumping through these regulatory hoops might be less of a disincentive if New York were otherwise an attractive place for retailers to set up shop. But it’s not. As John S. Dyson, the chairman of Mayor Giuliani’s Council of Economic Advisors, points out, businesses in New York face a unique set of costs: charges for electricity, water, and sewage that far exceed those of surrounding areas, a 10 percent corporation tax on top of the 10 percent state tax, a high real estate tax, and legal harassment from the police and sanitation departments, which boost city revenue by the overzealous collection of fines. In addition, the city requires businesses to complete a formidable array of environmental reviews before they can even consider opening their doors. Criminals impose their own form of taxation, too: higher-than-average shoplifting by urban customers and employees, along with Mafia-inflated costs for such services as trucking and construction. Little wonder that so many retailers choose instead to locate beyond the city limits.

Faced with all these impediments to retailers, the Giuliani administration has come up with a range of measures to ease existing restrictions on commercial development—simplifying licensing requirements, discouraging the ticketing of small businesses for minor violations, and reducing the commercial occupancy, sales, and gross-receipt taxes. But the keystone of the administration’s strategy is the Planning Department’s proposal for reforming the city’s zoning laws.

The department proposes to raise the space limit on retail establishments in manufacturing zones from 10,000 to 200,000 square feet. Though certain restrictions would still apply—stores of over 45,000 square feet, for example, would have to prepare a traffic control plan and pay for any necessary road improvements—the wide streets of the city’s manufacturing areas would be open at last to every sort of retailer to build the big stores that customers want. To give some idea of what this could mean at street level: full-service suburban supermarkets range from 50,000 to 80,000 square feet, the average Wal-Mart measures 100,000 square feet, and an IKEA often approaches 200,000 square feet.

The Planning Department believes that this zoning change would transform the retailing scene in New York and predicts that, in the wake of reform, between 50 and 60 large retailers would open in the city over the next decade, bringing the total number of such stores back to pre-1974 levels. Such a retail renaissance would mean $100 million in new tax revenues, and it would create some 12,000 to 15,000 new jobs, a welcome boost for New York City’s long-flaccid economy, which has seen retail employment drop by more than 12 percent in the past 20 years despite a nationwide upsurge of 59 percent.

As yet, the mayor’s proposal is far from creating its first happily employed salesclerk or satisfied customer. The five borough presidents have lined up against the rezoning plan. And at the City Planning Commission’s final public hearing on the proposal in September, 20 of the city’s 59 community boards—advisory bodies appointed by the borough presidents and the members of the City Council—added their opposition. They are reluctant to give up the input that helps make the current zoning review process so time-consuming, and they hope to win concessions from Mayor Giuliani before the crucial City Council vote on the plan expected in November. Similarly, many members of the Council would rather consider zoning changes on a case-by-case basis, a strategy that Manhattan borough president Ruth Messinger recommended in a June 1996 report. Like most politicians, they balk at reforms that will diminish their power and control. For his part, Giuliani is prepared to negotiate some details of the plan but insists that he will not allow these decisions to be made site by site. Nor should he. New York needs a clear commitment to freeing up industrial zones for big-store retail development if it is to enjoy the spontaneous business growth on which a healthy urban environment depends.

City Council members are not alone in finding this an unwelcome prospect. Who are the loudest naysayers? Not, as the received wisdom would have it, the mom-and-pop bodegas, the independent booksellers, and the corner drugstores, though they’ve certainly complained. For every shopowner concerned about corporate competition there’s another who recognizes that the retail pie isn’t finite. Planning Department studies show that no one is more aware than small businesses of the benefits that megastores bring to a neighborhood: more customer traffic means more sales for everybody. When the Kmart planned for Queens failed to materialize, local store owners were disappointed, not relieved. They had looked forward to the revitalization of the whole area.

No, the strongest opposition to the megastores comes from organized constituencies more concerned with their own self-interest or ideology than with the public good.

In the case of the new big-box supermarkets, a small group of well-heeled food wholesalers has organized to fend off the competition. Four of them—General Trading, Key Food, Krasdale, and White Rose—own or supply over 80 percent of New York City’s nearly 1,500 food stores. While a striving immigrant or hardworking member of a racial minority may technically be the proprietor of your local Met Foods, Associated, or C-Town grocery store, in reality he operates at the sufferance of his wholesaler. He pays the distributor a fee to use the company name, buys his inventory from the distributor, and sells his merchandise at prices advertised by the distributor. Very often he also borrows much of the money to open his C-Town from Krasdale, for example, paying back a percentage every month and putting up his lease as a guarantee. If he goes under, the distributor just takes over the lease and brings in another operator.

This formidable interest—a big business if ever there was one—has formed groups with names like the “Neighborhood Small Business Association” and the “Puerto Rican Asian Hispanic Development Corporation” to hold press conferences and to testify before the City Council. “It’s political theater, dreamed up by lawyers and PR people,” says city hall’s John Dyson. “The wholesalers have every right to protest, but they should do it honestly and not make it look as though it’s the local small storekeepers who are objecting. ”The big food wholesalers also rank among the largest contributors to City Council campaigns. Pamela Fairclough of the Community Food Resource Center sees them as OPEC-like profiteers: “Like a cartel, their prices are higher and their selection is limited. And like a cartel, they coordinate their activities through political contributions and political lobbying to protect their profits.”

Environmental groups have added their voice to this obstructive chorus, objecting to megastores just as they have to every other promising scheme for development in New York in recent memory. They have conjured up the specter of more cars, more pollution, and more strain on the city’s increasingly threadbare infrastructure if the zoning reform passes. The Planning Department has responded with an environmental-impact statement showing that the proposed change would, in fact, cut down on long-distance driving, with fewer customers heading to the suburbs to shop, and that the low-density manufacturing zones appropriate for retail use can easily handle more traffic.

Protesters and activists won’t admit it, but big stores bestow many benefits, in terms of both economic development and quality of life, on surrounding communities. Analyzing data from ten big cities—Baltimore, Boston, Chicago, Cincinnati, Cleveland, Detroit, Milwaukee, Philadelphia, St. Louis, and Washington, D.C.—in which megastores had opened between 1986 and 1991, Crain’s New York Business found in most cases an increase in the number of companies in similar retail categories during the same period. A 1992 study by the McKinsey Global Institute, a Washington consulting firm, discovered that strong retail competition expands both the total volume of sales and the total number of stores. In other words, if big retailers are allowed to flourish, small businesses don’t die; they adapt and take advantage of the wider market.

The city’s limited experience with megastores bears out the power of this multiplier effect. The Planning Department found that between 1973 and 1992, the number of toy stores with fewer than 20 employees rose by 31, despite an increase by seven in the number of stores with 50 or more employees. So, too, with bookstores: 75 new small stores arose in the shadow of six new larger stores. The Planning Commission reached similar conclusions when it carried out a study of the fate of small stores in areas where large supermarkets had opened. In Queens, the commission found no decrease in the number of supermarkets, and an increase in the number of small food stores, on the streets adjacent to the Clocktower Pathmark after it set up business there in 1985. Not only was there no evidence of disinvestment in the area—no increase in vacant stores or “Going Out of Business” signs—but competing stores upgraded their services, expanded their operating hours, and often began to specialize more. The city’s tax files also show that one- and two-family homes in the immediate neighborhood of the Pathmark were selling in 1995 for almost twice their 1985 value, a much higher jump than for homes just a few blocks farther away.

Big-box supermarkets like Pathmark or Fairway bring a far wider, more nutritious, and less costly selection of food to poorer neighborhoods. Residents of these areas clamor for the food megastores because their current options are so restricted: locally, they can shop either at convenience stores, which usually carry little more than junk food, or at small, badly run supermarkets, where fresh produce is scarce and packaged goods are expensive. A bit of comparison shopping on a summer afternoon illustrates the point. At the controversial new Fairway in Harlem, one finds fresh ears of corn, still silky, piled high at 10 for $1.99. Canned white meat of tuna sells for $1.39, red peppers for 99 cents a pound. At the Xtra Super Jumbo market a few blocks away on 138th Street, corn that looks as though it might have been picked last year costs 99 cents for three ears; tired-looking red peppers at the nearby C-Town are $1.29 a pound, and a can of tuna, of the same brand and size as at Fairway, costs $1.69. These differences hold across a whole range of products.

To see how much a megastore can help to reinvigorate a depressed neighborhood, just visit the Fairway at 133rd Street and Twelfth Avenue in west Harlem, a 35,000-square-foot food emporium that the city suffers to exist under a zoning scheme that classes it as three different businesses. An independent operation, outside the control of wholesalers, Fairway is Manhattan’s largest food store and, according to residents, the best thing that has happened to west Harlem in years.

Since the store opened in December 1995, it has been a magnet, drawing people from all over the city to a combination specialty store/big-box space where they can find everything from fresh brick-oven pizza to megaboxes of detergent, from live lobsters to 50-pound bags of sugar. And it is not just New Yorkers arriving in droves by car and subway. Reversing the time-honored trend, suburbanites are crossing the river in search of bargains.

The new Fairway has all the excitement of a bazaar, where the city’s diverse residents come together in the common pursuit of nourishment and the hope of getting it for less. A well-dressed black yuppie pushes one of the store’s oversized shopping carts down the produce aisle, loading up with basil, arugula, and other exotic greens. A gray-haired woman in a sari fills her cart with giant bags of rice and other fixings for a wedding feast. A caterer scoops up olives, and a resident physician from Columbia University Medical Center grabs a dozen of the 40,000 bagels baked here every week. A portly, balding man who says he grew up in this neighborhood remarks, “It’s good to see something coming up here besides drugs.” A teenager asks his father, who’s putting a melon on top of an overloaded cart, “What’s Mom going to say when she sees all this stuff?”

The Fairway staff is a rainbow coalition. Among its many-hued members are blacks underemployed elsewhere in Harlem (where many store owners hire only relatives and compatriots) and recent immigrants taking a first step up the economic ladder. Young men pack bags at the checkout counters and push heavily laden shopping carts into the 200-car parking lot across the road, pocketing tips as they go; young women, many of them Hispanic, operate the cash registers.

Urban aesthetes, disdainful of middle class tastes and suspicious of middle-class respectability, reject the idea that such superstores are a civic blessing. Herbert Muschamp, the New York Times’s architecture critic, has written of his doubts about “remodeling New York for the bourgeoisie.” Citing the growth of Business Improvement Districts, the reclamation of Bryant Park, and the new zoning proposals as elements in a disturbing pattern, he sniffed disapprovingly at what he called “the capitulation of the public planning process to private enterprise.” For Muschamp and the city’s “progressive” establishment, a New York that is attractive to the middle class is a New York lacking in style and sophistication.

Fortunately, such thinking is on the wane in the city. Middle-class New York is on the rebound. Crime is down; the city has become more livable. But the city’s vital center, the middle class, wants amenities too, including access to the best in modern retailing. The megastores are waiting for an appropriate welcome: sensible zoning laws that reflect not the ill-founded hopes of yesterday’s planners but the pressing needs of today’s city.